"You can fool some of the people all of the time, and all of the people some of the time," U.S. President Abraham Lincoln once famously quipped, "but you can not fool all of the people all of the time."
Those words, from the man under whose watch the U.S. dollar was born (and whose bearded visage graces the front of the 5-dollar bill today) could very well apply to the current state of the interbank dollar markets, as hushed rumors of currency manipulation solidified this week into headlines from London, Beijing and Tokyo.
Some background: ever since the European financial crisis began affecting banks' ability to borrow in late summer, one of the most stealthily discussed subjects has been the ability of certain European banks to do business in dollars. As the euro-to-dollar exchange rate rose sharply from late August on, meaning dollars were more expensive when quoted in euros, European banks held on fast to their now-precious American banknotes. In a dash to keep dollars from walking out the door, banks began offloading businesses, such as aircraft leasing arms, that ate up into their dollar reserves.
But something was off: the price banks were charging each other to borrow dollars, while rising steadily, was not spiking the way market observers had expected. While there has been a substantial jump in the London Interbank Overnight Rate (LIBOR), the benchmark rate at which banks reported to a central London clearinghouse how much they were being charged to take out dollar-denominated loans from other banks, the rise was gradual and did not appear to reflect the Manichean vagaries of the marketplace.
Reports began surfacing that the banks were cooking the stats they were reporting to the British Bankers' Association, minimizing the amount being bid up and making LIBOR, in the words of one market strategist "an average rate at which no one trades." Perhaps more notably, some Italian and Spanish banks, who borrow relatively large amounts from their peers and were reportedly paying a premium of up to 100 basis points for the privelege of taking out a three-month loan in dollars, were not reporting their borrowing rates to London.
Some suspected outright fraud. While the LIBOR has kept rising steadily (it hit a multi-year high Wednesday), traders fiddling with the numbers will likely think twice now after seeing the headlines out of Tokyo, where UBS (XETRA:UBRA) and Citigroup (NYSE:C) are about to be penalized by Japanese regulators for engaging in some numerical window-dressing back in March of 2007. The charge: traders within the banks' derivatives units, which might now be suspended from operating in the country at all, were improperly asking peers to fudge the numbers reported to the Japanese group that puts out Tokyo's own interbank dollar lending rate.
Unethical traders in high-margin, high-pressure desks are not the only ones that make a habit of messing about with the international dollar rate. The People's Republic of China, with its strict controls on the exchange rate at which it will allow the dollar to float against the yen, is perhaps the world's most notorious currency manipulator. But sometimes, even the mighty Chinese government cannot go against the force of a market clamoring for dollars. Friday marked the eighth-straight session the renminbi fell to the lowest possible point permitted by the Chinese central bank, essentially forcing the central bankers to open the floodgates of their foreign currency reserves and artificially prop up the value of the local currency.
A lesson currency manipulators might be wise to take away from all this: don't bet your bottom dollar you can mess with the dollar.